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FX.co ★ The euro sets a bad example

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Forex Analysis:::2023-02-05T12:02:32

The euro sets a bad example

The European Central Bank was late to the party and is now trying to convince investors that it will be the last to leave. In other words, the ECB has been procrastinating on tightening monetary policy and is now ready to raise rates by 50 bps in March, while its colleagues from other countries are hinting at a rapid pause in the monetary tightening process. However, ECB President Christine Lagarde is not doing a very good job. Her contradictory statements made the market doubt the decisiveness of the Governing Council and temporarily pushed EURUSD lower than 1.09.

Before the February meeting, investors were confident that the ECB would add half a point to the cost of borrowing, which eventually happened. But then why did Lagarde say that the decision was the fruit of a compromise? Doesn't that mean that the Bloomberg insider who claimed in mid-January that the Governing Council is considering how to slow down monetary tightening is right? The ECB says one thing and intends to do something else entirely? Is the Federal Reserve's bad example contagious?

Central bank rate trends

The euro sets a bad example

There is more to come. Lagarde said that the ECB intends to raise the deposit rate by 50 bps in March as well, but this intention is not an unconditional commitment. If so, with monetary policy dependent on data, a 25 bps hike in borrowing costs cannot be ruled out. Lagarde seems to have muddled through her own words, seeking to please both the hawks and the centrists of the Governing Council. That's what the financial markets needed. It's no secret that the EURUSD rally from its September lows turned out to be fast. Bulls just needed a signal to lock in profits on long positions. They got it in Lagarde's contradictory stance. As a result, the euro was forced to retreat.

In fact, there's a chance that the ECB would be the last to leave monetary policy tightening. Inflation in the euro zone is not slowing as fast as in the U.S., and Spanish consumer prices have started to draw a new extreme. If the German CPI does the same, the futures market will raise expectations for the deposit rate ceiling from less than 3.4% to above 3.5%, which will bring EURUSD bulls back to the market.

Inflation trends in the eurozone, Britain and the US

The euro sets a bad example

The euro sets a bad example

As for the US central bank, in fact, Fed Chairman Jerome Powell and his colleagues are out of the picture. The main question is: Will they cut the federal funds rate in 2023? Although the Bank has been resisting the idea in every possible way, it has already started to allow it in February. That is the market's opinion. That said, everyone is entitled to their opinion.

Technically, the Wolfe Wave pattern persists on the weekly chart of EURUSD. Based on the projection of the from volume 5 to line 1-4, its potential is pretty good. We are talking about reaching 1.28. Probably in 2024 or 2025. In any case, in a strong uptrend, the euro pullbacks should be used for long positions on the EUR/USD.

Analyst InstaForex
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